Can You Buy A Foreclosed Property With A VA Loan?
Ashley Kilroy5-minute read
November 22, 2021
Sure, there is something appealing to a shiny new house. But there are plenty of future home buyers interested in not only formerly owned homes but foreclosed ones as well.
Foreclosure is a legal process where the mortgage servicer takes back ownership of a home when the client fails to make payments. Once the foreclosure process is completed, the mortgage servicer or Investor will sell the property. This is the stage of where you can buy the home.
Foreclosed homes may not sound appealing at first, but they come with advantages. For example, they usually sell below the typical price you expect, so you save money. That can be a valuable opportunity for veterans looking to get the most bang for their buck.
A VA loan also comes with its own set of perks, which most veterans and their families can take advantage of. That’s true now more than ever. In fact, the VA experienced a record year during 2020 when it guaranteed over 1.2 million home loans totaling more than $363 billion.
But can you buy a foreclosed property with a VA loan? Here’s what you need to know to utilize both these cost-effective options.
The Short Answer About A VA Loan Foreclosure Purchase
Yes, it is possible to use a VA home loan to purchase a foreclosed home. However, the property must meet the VA’s minimum property requirements to qualify for a loan. Below are the rules you need to know.
VA Rules Add A Complication To Foreclosed Home Buying
When you apply for a VA home loan, your application must meet the VA’s requirements to qualify for a mortgage. These requirements are designed to protect you as the borrower, your lender, loan servicer, and the VA itself.
Since the VA guarantees these loans, they take responsibility for the loan debt if you can’t pay your lender back. So, no harm comes to the mortgage provider. Likewise, the VA also creates rules that are meant to protect you as the homebuyer.
These rules are called the VA minimum property requirements (MPRs). The VA created and outlined minimum property requirements for every property to abide by before loan approval to protect the interests of veterans and their families.
The main goal of the MPRs is to ensure veterans and their loved ones move into a property that is safe, sanitary and structurally sound. Here are the key requirements to know:
- Property is residential
- Roof has no major defects
- Major mechanical systems (such as heating, electrical and plumbing) are in good working order
- Broken windows must be fixed or replaced
- No lead-based paint. Homes built before 1978 may be assumed to have lead-based paints and must be scraped and repainted
- Sufficient size for basic living needs
- Free of pests like termites, as well as fungus and dry rot
- Safe and sanitary sewage disposal
- Access to all-weather public or private streets
- Accessible and properly vented attics/crawl spaces
While these requirements complicate the process, they save you money in the long run. Imagine purchasing a home with a faulty deck or staircase. Not only do you face repair costs, but any potential medical bills those shoddy structures cause. Every property is different, though. Some homes may not seem like they will fit into the VA’s requirements, but you can always check.
Lenders will learn of any deficiencies with a property thanks to appraisal guidelines. So, if something falls outside the rules, you just need to look elsewhere.
The VA may insist on certain MPRs depending on the area or state the home is in. You can find information concerning the MPRs for properties depending on their location using the VA’s website. You also visit the outlined MPR government document for further specifics.
The Advantages Of A VA Home Loan
VA loans aren’t just easier to qualify for than loans provided under alternate programs. They also offer a significant source of financial aid to veterans and service members. They’re highly versatile and can be used to finance home upgrades and renovations, purchase foreclosed properties or cash out the equity that you possess in your home. VA loans additionally use a different formula when calculating applicant’s debt-to-income (DTI) ratio, which can help qualifying borrowers afford more home as well.
So, a VA loan offers advantages compared to a traditional lender. But the above isn’t all.
VA loans offer lower interest rates than you may receive with a traditional or conventional mortgage. In addition, you don’t have the same consequences for a low credit score or minimal down payment. You can even forgo the down payment, and you won’t even face the cost of primary mortgage insurance (PMI). It’s not required on a VA loan.
Other ways a VA loan may save you money include low closing costs (about 3% – 5%), a streamline interest rate reduction program, and no prepayment penalties.
Consider This Before Buying A Foreclosed Property With A VA Loan
While there are advantages for those buying a property with a VA loan, there are also some pitfalls. You may meet a few hurdles while buying a foreclosed property.
For example, you don’t have to worry about updates or maintenance right away with a new home. But a foreclosed home will likely come with several features that need to be fixed. Oftentimes, if a homeowner knows their home will go into foreclosure, they may not address issues. So, problems may stack up with a foreclosed property.
From this, it’s important to note that many properties are sold as-is. Whatever issues they had before the lender took possession will stay with them. If you don’t have the funds to address potentially high-cost repairs, it may not be a worthwhile investment for you.
Because a distressed property requires more approvals and paperwork, your closing process may be difficult. You might face several complications or lulls in the process. Thus, it may take longer for you to close on a foreclosed home than a traditionally sold property.
These hurdles apply regardless of whether you use a VA loan or any other type of loan. So, no matter your financing options, consider your choice carefully before purchasing a home. A foreclosed property comes with its benefits, but it may not be the right move for you.
Final Thoughts: Buying A Foreclosed Home With A VA Loan
VA loans may make buying a foreclosed home tricky. You must ensure that your future home meets the list of requirements for loan approval. While that complicates things, it ensures you and your loved ones move into a safe and secure home. It’s vital you evaluate any potential foreclosed property for its benefits and drawbacks before purchasing.
If you’re planning to buy a home, many concerns may be on your mind. Be sure to review some helpful articles from our Home Buying Resources. That way, you’re prepared for anything that may come your way.
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